US 20040199450 A1 Abstract Methods and systems for an exchange to handle variable derivative product order prices are disclosed. The price of a derivative product order (bid or offer) is updated based on changes in the price of a related underlying product. Price determination variable(s), such as delta and gamma, are used to determine the price of the order. The exchange may periodically recalculate the price without requiring the trader to transmit additional information to the exchange.
Claims(30) 1. A method of dynamically determining a price for an order for a derivative product at an exchange, comprising:
(a) receiving at an exchange a variable priced order for a derivative product, where the variable priced order comprises a derivative product identifier, an underlying product identifier, an original order price and at least one price determination variable value; and (b) determining a price for the order as a function of the original order price, an updated price of the underlying product and the at least one price determination variable value based on a predetermined formula. 2. The method of (c) periodically determining a price for the order based on the predetermined formula and a more recent price for the underlying product.
3. The method of Change in price of the order=chgUnderlyingprice*delta+(½(chgUnderlyingprice{circumflex over ( )}2*gamma))
where chgunderlyingprice is the change in price of the underlying product. 4. A method of processing a variable derivative product order at an exchange, the method comprising:
(a) receiving at the exchange the variable derivative product order that includes a price that is a function of at least one price determination variable; (b) calculating a trading price from the function; and (c) executing a trade based on the calculated trading price. 5. The method of 6. The method of 7. The method of ChgUnderlyingPrice*delta+(½(ChgUnderlyingPrice{circumflex over ( )}2*gamma)),
wherein ChgUnderlyingPrice is the change in the underlying price.
8. The method of (d) executing a hedge transaction at the time of executing the trade. 9. The method of 10. The method of 11. The method of 12. The method of 13. The method of 14. The method of 15. The method of 16. The method of 17. The method of 18. The method of 19. A method of determining variable derivative product order prices, the method comprising:
(a) receiving from an exchange a plurality of variable derivative product order prices that are each a function of at least one value of an underlying product; (b) receiving from the exchange values of the underlying products; and (c) based on the information received in (a) and (b), determining the variable derivative product order prices. 20. The method of 21. The method of 22. A method of distributing variable derivative product order information, the method comprising:
(a) receiving from a first plurality of users variable derivative product order prices that are a function of at least one value of at least one underlying product; and (b) transmitting to a second plurality of users the variable derivative product order prices and the at least one value of the at least one underlying product. 23. The method of 24. A method of trading a derivative product contract, the method comprising:
(a) establishing a variable derivative product order price that is a function of a preset formula and user supplied price determination variable values; and (b) providing to an exchange the variable derivative product order. 25. The method of 26. The method of 27. The method of ChgUnderlyingPrice*delta+(½(ChgUnderlyingPrice{circumflex over ( )}2*gamma)),
wherein ChgUnderlyingPrice is the change in the underlying price.
28. The method of receiving an underlying price from the exchange; and calculating the order price from the variable derivative product order price. 29. The method of 30. A computer-readable medium containing computer-executable instructions for causing a trading computer to perform the steps comprising:
(a) establishing a variable derivative product order price that is a function of a preset formula and user supplied values of price determination variables; and (b) providing to an exchange the variable derivative product order. Description [0001] The present invention relates to derivative product trading methods and systems and, in particular, to methods and systems that utilize a variable defined order price. [0002] Computer systems and networks are increasingly being used to trade securities and derivatives. Computer systems and networks provide several advantages when compared to manual methods of trading. Such advantages include increased accuracy, reduced labor costs and the ability to quickly disseminate market information. [0003] Options are frequently traded via computer systems and methods. An option may be used to hedge risks by allowing parties to agree on a price for a purchase or sale of another instrument that will take place at a later time. One type of option is a call option. A call option gives the purchaser of the option the right, but not the obligation, to buy a particular asset either at or before a specified later time at a guaranteed price. The guaranteed price is sometimes referred to as the strike or exercise price. Another type of option is a put option. A put option gives the purchaser of the option the right, but not the obligation, to sell a particular asset at a later time at the strike price. In either instance, the seller of the call or put option can be obligated to perform the associated transactions if the purchaser chooses to exercise its option or upon the expiration of the option. [0004] Traders typically use theoretical models to determine the prices at which they will offer to buy and sell options. The theoretical option pricing models often produce values that reflect an option's sensitivity to changes in predefined variables. These predefined variables are assigned Greek letters, such as delta, gamma, theta and kappa. Kappa is sometimes referred to as vega or tau. Delta is a measure of the rate of change in a derivative's theoretical value for a one-unit change in the price of the option's underlying contract. Thus, delta is the theoretical amount by which the derivative price can be expected to change for a change in the price of the underlying contract. As such, delta provides a local measure of the equivalent position risk of an option position with respect to a position in the underlying contract. A “50 Delta” option should change its price {fraction (50/100)}, or ½ a point, for a one point move in its underlying contract. [0005] Gamma is a measure of the rate of change in an option's delta for a one-unit change in the price of the underlying contract. Gamma expresses how much the option's delta should theoretically change for a one-unit change in the price of the underlying contract. Theta is a measure of the rate of change in an option's theoretical value for a one-unit change in time to the option's expiration date. Vega is a measure of the rate of change in an option's theoretical value for a one-unit change in the volatility of the underlying contract. Delta, gamma, and vega are the primary measures used by those who trade in options. [0006] A single option order typically identifies the underlying security, the expiration month, whether the option is a call or a put, the strike price and all other standard order terms (e.g. buy/sell, quantity, account number etc.). Each time the price of the underlying contract changes or one of the variables in the trader's theoretical model changes, a trader may cancel all of the relevant pending orders, recalculate new order prices and transmit new order prices to the exchange. It is not uncommon for the price of an underlying contract to change multiple times per second. In addition to receiving a large volume of order traffic, options exchange computer systems transmit current market data to traders. One skilled in the art will appreciate that the amount of data sent to and from an options exchange computer system can be a significant challenge for the computer system and can limit the scalability of the computer system. In addition, there is a similar challenge to manage the bandwidth usage between the option's exchange computer system and network connecting the end user given the high volume of associated market data updates. [0007] Therefore, there is a need in the art for improved derivative product trading methods and systems that better manage the amount of information that must be exchanged between traders and an exchange computer system. [0008] The present invention overcomes the problems and limitations of the prior art by providing methods and systems that utilize a variable derivative product order price. Derivative products include options on futures contracts, futures contacts that are functions of other futures contracts, or other financial instruments that have their price related to or derived from an underlying product. The variable derivative product order price may be in the form of a model used to price options. When one of the variables of the model changes, an exchange computer system may recalculate the derivative product's price without requiring the trader to transmit additional or different information to the computer system. [0009] In one embodiment, a method of trading variable derivative product orders at an exchange is provided. The method includes receiving from traders a plurality of derivative product orders. Each of the orders has a price that is a function of a predetermined formula, at least one underlying product and price determination variable values supplied by the trader. Bid and offer prices are calculated by applying the price determination variable values and underlying product values to the predetermined formula. Trades are executed based on matching bids and offers. [0010] In another embodiment, a method of determining variable derivative product order prices is provided. A plurality of variable derivative product order prices that are each a function of at least one value of an underlying product are received from an exchange. Values of the underlying products are also received from the exchange. The variable derivative product order prices are determined from the received information. [0011] In yet another embodiment of the invention, a method of distributing variable derivative product order information is provided. Variable derivative product order prices that are a function of at least one value of at least one underlying product are received from a first plurality of users. The variable derivative product order prices and the at least one value of the at least one underlying product are transmitted to a second plurality of users [0012] In other embodiments, the present invention can be partially or wholly implemented on a computer-readable medium, for example, by storing computer-executable instructions or modules, or by utilizing computer-readable data structures. [0013] Of course, the methods and systems of the above-referenced embodiments may also include other additional elements, steps, computer-executable instructions, or computer-readable data structures. In this regard, other embodiments are disclosed and claimed herein as well. [0014] The details of these and other embodiments of the present invention are set forth in the accompanying drawings and the description below. Other features and advantages of the invention will be apparent from the description and drawings, and from the claims. [0015] The present invention may take physical form in certain parts and steps, embodiments of which will be described in detail in the following description and illustrated in the accompanying drawings that form a part hereof, wherein: [0016]FIG. 1 shows a computer network system that may be used to implement aspects of the present invention; [0017]FIG. 2 illustrates a system in which traders exchange information with a match system, in accordance with an embodiment of the invention; [0018]FIG. 3 illustrates a variable derivative product order in accordance with an embodiment of the invention; [0019]FIG. 4 illustrates a computer implemented method of trading a derivative product contract that involves the use of a variable order price, in accordance with an embodiment of the invention; and [0020]FIG. 5 illustrates a method of processing variable derivative product orders by an exchange computer in accordance with an embodiment of the invention. [0021] Aspects of the present invention are preferably implemented with computer devices and computer networks that allow users to exchange trading information. An exemplary trading network environment for implementing trading systems and methods is shown in FIG. 1. An exchange computer system [0022] The trading network environment shown in FIG. 1 includes computer devices [0023] Computer device [0024] Exchange computer system [0025] Computer devices [0026]FIG. 1 also shows LAN [0027] One or more market makers [0028] The operations of computer devices and systems shown in FIG. 1 may be controlled by computer-executable instructions stored on computer-readable medium. For example, computer device [0029] Of course, numerous additional servers, computers, handheld devices, personal digital assistants, telephones and other devices may also be connected to exchange computer system [0030]FIG. 2 illustrates a system in which traders [0031] Match system [0032] Price calculation module ChgUnderlyingPrice*delta+(½(ChgUnderlyingPrice{circumflex over ( )}2*gamma)), (1) [0033] wherein ChgUnderlyingPrice is the change in the underlying price. A trader would supply price determination variables delta and gamma and price calculation module would track the derivative product price as the underlying contract changes. [0034] An order risk management module [0035] A formula database [0036] The formulas may be provided by traders or may be standard formulas provided by an exchange. A market data module [0037]FIG. 3 illustrates a variable derivative product order [0038]FIG. 4 illustrates a computer-implemented method of trading a derivative product contract that involves the use of a variable order price, in accordance with an embodiment of the invention. First, in step [0039] In step [0040] The price determination variables may include delta, gamma, and vega. When the price determination variables have changed, in step [0041] One of the advantages of the present invention is that it allows traders to maintain an order book and limits the amount of information that must be disseminated by an exchange computer. In particular, an exchange computer may transmit a plurality of variable derivative product orders to several different traders only when other derivative product order users establish their initial positions. Thereafter, the exchange computer may then only transmit underlying data or other data used to calculate variable derivative product order prices. Each trader computer may then periodically calculate current order prices based on information received from the exchange computer. For example, in step [0042]FIG. 5 illustrates a method of processing variable derivative product orders by an exchange computer in accordance with an embodiment of the invention. First, in step [0043] Of course, an exchange computer may be configured to repeat the method shown in FIG. 5 several times. [0044] The present invention has been described herein with reference to specific exemplary embodiments thereof. It will be apparent to those skilled in the art, that a person understanding this invention may conceive of changes or other embodiments or variations, which utilize the principles of this invention without departing from the broader spirit and scope of the invention as set forth in the appended claims. All are considered within the sphere, spirit, and scope of the invention. For example, while aspects of the present invention have been described in connection with the trading of derivative products, in other embodiments, aspects of the invention may be used in connection with the trading of securities, such as debt, foreign exchange, and equity commodities, and other instruments for which options or other derivative instruments are traded. Patent Citations
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